A Historic Admission from J.P. Morgan

“JPMorgan Chase & Co. (‘JPMorgan’) admits to the facts set forth below and acknowledges that its conduct violated the federal securities laws.”

As a statement, it may be short and lacking in linguistic flourishes. It’s also all the way back on page 21 of the Securities and Exchange Commission’s order, in an Annex A.

But this seemingly bland wording reflects a sea-change in how the SEC operates — and a landmark in J.P. Morgan history that its unlikely to want to remember.

J.P.Morgan’s mea culpa is only the second such acknowledgement of wrongdoing — and the first by a major bank — since SEC Chairman Mary Jo White in June stunned defense lawyers by announcing that the agency was axing the standard boilerplate of allowing firms to settle allegations without admitting or denying wrongdoing. In certain cases, she said, firms and individuals will in future have to admit wrongdoing or fight the case in court.

The SEC’s ability to get such a huge Wall Street firm as J.P.Morgan to be an early example of this policy is an undoubted feather in Ms. White’s cap.
But the terms of the landmark deal are certain to be pored over – and not just by plaintiff lawyers looking to see if there’s any ammunition for using the admission in private follow-on lawsuits.

One question: What, if any, concessions has the SEC had to make to persuade J.P.Morgan to make such a high-profile admission?

George Canellos, the SEC’s co-chief of enforcement, said in a statement the SEC decided to apply its new policy of requiring admissions to the J.P.Morgan case because the firm’s “egregious” breakdowns in controls and governance “put its millions of shareholders at risk and resulted in inaccurate public filings.”

But why does such egregious conduct merit a fine of only $200 million? To put that in context, it’s less than half the $550 million Goldman Sachs Group Inc. paid in 2010 to settle allegations it misled investors in a mortgage bond deal, without admitting or denying wrongdoing. It’s also less than the $300 million the Office of the Comptroller of the Currency collected from J.P. Morgan on the ‘Whale’ case.

Mr. Canellos said the $200 million penalty is “unprecedented for an internal controls case” and one of the largest in the SEC’s history.

But some officials inside the SEC have already privately expressed concerns about whether the agency will have to accept lower financial sanctions as the price of gaining an admission of wrongdoing. The J.P.Morgan deal could start that debate in earnest.